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GLOSSARY
Accelerated Depreciation. A system that allows companies to increase the depreciation charges for tax purposes. This would lower the tax paid by corporations and therefore provide more funds for business investment spending.
Accelerator. A theory that states that the amount of business investment spending depends on the amount of expected sales.
Accomodation. The Federal Reserve increases the money supply in response to the increase in interest rates that result from an increase in the federal government budget deficit.
Adaptive Expectations. Expectations of the future are based on the present and recent past.
Adjusted Gross Income. The income on which one will pay taxes. It includes income minus deductions and exemptions.
Aggregate Demand. The demand for all goods and services produced in the United States.
Aggregate Supply (Short Run). The supply of all goods and services produced in the United States in the short run (see below for the definition of the short run).
Appreciation The increase in the value of one country’s money in relation to other countries’ monies.
Appropriations Bills. Bills that authorize government spending in 13 different areas.
Asset Demand for Money. People holding money as part of their wealth as an asset. This depends mainly on real interest rates and on expected inflation. The lower the real interest rates and the lower the expected inflation, the more money people are willing to hold as part of their wealth.
Austerity. Conditions set by the International Monetary Fund as a condition of its loans. These acted to reduce total spending in the borrowing country and included reductions in government spending, raises in taxes, reductions in the money supply, and higher interest rates.
Automatic Stabilizers. Increases in government spending for unemployment benefits, welfare, and Social Security and reductions in income taxes that occur automatically as income falls. These increase aggregate demand when it is too low to generate full employment.
Average Indexed Monthly Earnings (AIME). The Social Security Administration takes the monthly earnings on which Social Security taxes were paid over the best 35 years of one’s working life, adjusts each month to the purchasing power of the date one turns 62, and then takes an average. This is used to determine one’s monthly Social Security benefit.
Average Propensity to Consume. The percent of disposable income spent on consumer goods. (147)
Average Tax Rate. Taxes paid as a percent of income.
Bail In. Foreign financial institutions agree to roll-over the debt of developing countries and to substitute longer-term debt for the short-term debt that had existed.
Balanced Budget Multiplier. A number that multiplies an equal change in both government spending and taxes in the same direction. The number equals one.
Barter. The act of trading goods for goods.
Beneficial Supply Shocks. Factors that acted to decrease costs of production and thereby increase aggregate supply. Included here are the increase in labor productivity, the reduction in oil prices, the reduction in the growth of health care costs, the strong American dollar, and so forth.
Black Market. Selling illegally at a price higher than is allowed by law
Bracket Creep. Inflation causing one to creep up into a higher tax bracket.
Bretton Woods System. An international financial system in which foreign monies were based on the American dollar at fixed exchange rates and the American dollar was tied to gold at $35 equal one ounce. The dollar supplemented gold as international money. Countries experiencing inflation would experience a reduction in their money supply, reducing the inflation rates.
Budget Deficit. The government has a budget deficit when it spends more than it takes in as tax revenue.
Budget Resolution. By April 15, both Houses of Congress must agree to the total spending in the coming fiscal year, the total tax revenues, the budget deficit or surplus, and spending in broad areas, such as defense.
Business Cycle. Production, measured by Real Gross Domestic Product, rises for some time, stops rising, falls for some time, stops falling, and then begins to rise again.
Capacity Utilization. The percent of the current capacity of the capital goods that is being used in production. And increase in capacity utilization, other things equal, should cause an increase in business investment spending.
Capital Gains. An increase in the value of an asset, usually a stock or a home. The maximum tax on capital gains from stocks is now 20%. For most people now, there is no capital gains tax from the sale of a home one lived in.
Capital Goods. Goods that will increase the ability of the business to produce --- goods such as machines, tools, equipment, factory buildings, office buildings, and so forth.
Central Bank. A bank for commercial banks.
Certificate of Deposit (CD). An account at a financial institution for which the depositor cannot ask for payment until a specified time has passed.
Classical Economics. The views of economists up to about 1930 who believed that an economy has ways to cure itself of recession or inflation in a short time if left alone.
COLA (Cost-of-Living Adjustment). If you have a COLA, your income is adjusted automatically to reflect the increase in prices, as measured by the increase in the Consumer Price Index (CPI)
Collateral. Something physical that a lender gets if a borrower is unable to pay a debt.
Commercial Paper. The short-term IOU of a very large corporation.
Commodity Money. Commodities that serve as a medium of exchange, such as gold or silver.
Compensation. The total of wages, salaries, and fringe benefits.
Complement. A different good that goes together with the one under consideration.
Congressional Budget Office (CBO). The agency that works for Congress and primarily analyzes the President’s budget proposal. It is headed by a Director.
Constant Money Growth Rule. The belief by Monetarist economists that the Federal Reserve Board should be bound by a fixed rule to increase the money supply by a fixed percent every year.
Consumer Confidence. A measure of consumer expectations about the future of the economy. The number for 1985 is called 100. A rise (fall) in the number means that consumers are becoming more optimistic (pessimistic).
Consumer Price Index. Compares the amount one would pay to buy the goods and services included in the “market basket” today to the amount one would have paid to buy the same goods and services in the base year
Consumption. Spending by consumers, people who buy goods and services to consume them, or use them up.
Contractionary Fiscal Policy. A decrease in the structural budget deficit from one year to the next, causing aggregate demand to decrease.
Corporation. A business owned by stockholders, but legally separate from its stockholders, with limited liability for each stockholder.
Cost Inflation (or cost-push inflation). This inflation is caused by something that causes the cost of producing products to rise
Crowding out. A government budget deficit causes interest rates to rise, thereby decreasing business investment spending. Government “crowds out” business investment spending.
Current Account Deficit. The amount thatAmerican imports of both goods and services are greater than American exports of both goods and services.
Cyclical Unemployment. People who are unemployed because the number of jobs declines as buyers buy fewer products.
Deduction. See Tax Deduction.
Deflation. A general decrease in the aggregate price level.
Demand. The quantity of a product that buyers desire to buy at each possible price.
Demand for Money. The quantity of money that people choose to hold as part of wealth.
Demand Inflation (or demand-pull inflation). This inflation is caused by something that causes buyers of products to want to buy more products than are presently available.
Depreciation. The decrease in the value of one country’s money in relation to other countries’ monies. Also, the decrease in the value of capital goods due to wearing out or to obsolescence.
Depression. A very severe decline in production, measured by the Real Gross Domestic Product.
Determinants of Demand. The six factors, other than the price, that affect the demand for a product.
Devaluation. Under the Bretton Woods System, this was an official reduction in the value of a country’s money in relation to the monies of other countries. It could occur only if there were a “fundamental disequilibrium”.
Direct Foreign Investment. Owning and controlling a company in another country.
Discounting. A commercial bank borrows from the central bank.
Discount Rate. The interest rate charged by the central bank to a commercial bank.
Discouraged Workers. People who are not employed but are not counted as officially unemployed because they have given up searching for work.
Discretionary Fiscal Policy. Changes in government spending and in taxes that the President and Congress must determine every year.
Discretionary Spending. That part of the federal government over which the President and Congress must determine an amount of spending each year. Defense spending is an example.
Disinflation. A period in which the aggregate price level is rising, but at a lower rate than previously.
Disposable Income. The National Income minus Taxes paid plus Transfer Payments. (146)
Dividend. Profits of a corporation distributed in cash to the owners.
Downsize. A worker who loses a job because the employer is permanently reducing the number of workers.
Durable Good. A physical good that one can reasonable expect to last three years or more when one buys the good.
Entitlement. An entitlement program is a government spending program for which the government determines two aspects: who qualifies for the money and how much money one is qualified for. No upper limit is placed on the amount spent.
Entrepreneur. Someone who recognizes the desires of consumers and then brings together the appropriate natural resources, labor, and capital to meet these desires.
Equation of Exchange. The money supply times the velocity is equal to the price level (GDP Deflator) times the Quantity (Real GDP).
Equilibrium. The price for which the quantity demanded of a product is equal to the quantity supplied. There is no shortage or surplus.
Equilibrium Real GDP. The amount of production (real GDP) that will occur. It is determined where the amount buyers wish to buy (consumption plus business investment spending plus government purchases plus new exports) equals the amount sellers wish to sell (the real GDP).
European Monetary System (EMS). A system of maintaining fixed exchange rates between the European countries involved as a prelude to introducing a common currency, the Euro.
Excess Reserves. The amount in the account of a commercial bank at the central bank above the amount the commercial bank is required to have.
Exchange Rate. The number of dollars and American must pay for the money of another country.
Exemption. See Tax Exemption.
Expansion. A period during which production, measured by Real Gross Domestic Product, is increasing.
Expansionary Fiscal Policy. An increase in the structural budget deficit from one year to the next, causing aggregate demand to increase.
Export. Sale of a good to someone in another country.
Extensive Growth. Increasing the quantities of the factors of production.
External Technological Benefit. One company’s technological advantage is passed along to other companies as workers move, companies engage in joint projects, and so forth.
Factors of Production. Factors that are used to produce goods and services. These include natural resources, labor, capital goods, and entrepreneurship.
Federal Deposit Insurance Corporation (FDIC). A government agency which insures banks and other financial institutions against an inability to pay their depositors.
Federal Insurance Contributions Act (FICA). The tax to pay for Social Security. Currently 6.2% of income up to $84,000 of income --- matched by the employer.
Federal Funds. One commercial bank lends to another commercial bank.
Federal Funds Rate. The interest rate charged by one commercial bank to another commercial bank.
Federal Open Market Committee (FOMC). A main policy-making body of the Federal Reserve composed of seven Governors and five of the twelve Federal Reserve Bank Presidents.
Fiat Money. A medium of exchange whose value as a commodity is less than its value in exchange for goods and services. A token.
Fiscal Policy. There are two kinds of fiscal policy. First, there is a deliberate change in government spending to try to eliminate recessions or inflations. And second, there is a deliberate change in the tax system to try to eliminate recessions or inflations.
Fiscal Year (FY). October 1 to September 30. The federal government’s year.
Foreign Direct Investment. See Direct Foreign Investment
Foreign Exchange. The monies of other countries that are traded.
Frictional Unemployment. People unemployed because they are searching for a new job (or a first job).
Full Employment. Occurs when there is no cyclical unemployment. In order words, full-employment exists if the economy creates a job for every worker who wants one.
Fundamental Disequilibrium. Under the Bretton Woods System, this was a situation in which a country could not maintain its exchange rates with other countries and had to devalue its money.
Globalization. The increase in economic integration between the economies of the world --- increased foreign trade, portfolio investment, and foreign direct investment.
Gold Standard. A country “went on” the Gold Standard by defining its money in a fixed relation to gold and by allowing free entry and exit of gold.
“Golden Straightjacket”. See Washington Consensus.
Government Purchase. The federal government buys a good or service in the market from a private company or individual. Defense spending is an example.
Government Purchases Multiplier. A number that multiplies a change in government purchases in order to determine by how much equilibrium Real GDP will change. It is calculated as 1 divided by 1 minus the marginal propensity to consume.
Government Transfer. The government takes income from a person who earned it and transfers that income to someone else. The recipient does the spending. Social Security is an example.
Gramm Rudman Hollings Act. An act designed to reduce and then eliminate the federal government budget deficits. It requires yearly targeted reduction in the budget deficit and specified decreases in government spending that had to made be made in the President and the Congress could not agree on a way to meet these targets.
Gray Market. Finding ways to “get around” a price ceiling by charging for services that had formerly been provided free or by changing the nature of the product
Gross Private Business Investment Spending. The total spent by private businesses to buy capital goods.
Gross Domestic Product (GDP). Gross Domestic Product (GDP) is defined as the value of all final goods and services produced in the United States for the purpose of being sold during a year.
Gross Domestic Product (GDP) Deflator. A measure of the aggregate price level calculated as the Nominal Gross Domestic Product divided by the Real Gross Domestic Product (multiplied by 100)
Gross Domestic Product (GDP) Gap. The difference between the actual Real Gross Domestic Product and the Potential Gross Domestic Product.
Hedge Fund. A fund that collects money from rich investors and uses the money to speculate in the foreign exchange market.
Herding Behavior. One financial manager buys or sells a forrign money simply because all of the others are doing that.
Hyperinflation. Inflation rates that are extremely high.
Import. The purchase of a good produced in another country.
Index of Leading Economic Indicators. Composed of 11 economic variable that should rise or fall before Real Gross Domestic Production (Real GDP) rises or falls
Indexation. Adjusting the tax brackets by the amount of inflation so that a person will not go into a higher tax bracket because his or her income rises by the amount of inflation
Individual Retirement Account (IRA). A type of savings (or similar) account. One does not pay income tax on income put into this account. The interest is tax deferred.
Induced Consumption. The additional consumption caused by a change in disposable income, after there is a change in business investment spending, government purchases, or net exports. (156)
Inflation. A period during which prices in general are rising.
Inflation Hedge. Certain forms of saving tend to hold their value during a period of inflation. This means that if prices rise 10%, the value of these “inflation hedges” is likely to rise by at least 10%
Inflationary Gap. The amount production is above the goal (that is, the amount Real Gross Domestic Product is greater than Potential Real Gross Domestic Product). (154)
Infrastructure (or public capital). This includes goods such as roads, ports, airports, and communication facilities.